Natural-gas ETFs burn up the performance charts

JohnSpence

BOSTON (MarketWatch) -- The relentless climb in oil prices has vaulted exchange-traded products indexed to natural gas and the energy sector to the top of the performance lists so far in 2008 as some analysts see crude spiking as high as $200 a barrel.

Exchange-traded funds and notes have given individual investors low-cost and liquid vehicles for getting exposure to commodities markets. Among these new and specialized financial products, U.S. Natural Gas Fund
UNG, -2.18%
has risen the most year to date with a 46.2% return as of May 6, according to investment researcher Morningstar Inc.

The ETF has benefited from worries that supply and inventory issues could push crude-oil prices even higher. Billed as a new way for investors to hedge their exposure to energy, U.S. Natural Gas Fund is designed to track, in percentage terms, the movement of a natural-gas futures contract traded on the New York Mercantile Exchange. It is structured as a commodity pool and listed on the American Stock Exchange, with a management fee of 0.6%.

The natural-gas fund's manager and general partner, Victoria Bay Asset Management, runs other commodity products -- U.S. Oil Fund
USO, -3.17%
and U.S. 12-Month Oil Fund
USL, -2.49%
have each gained about 30% so far this year. A related offering, U.S. Heating Oil Fund
UHN, -1.83%
debuted in early April.

Investors have several other options in oil, natural gas and energy. For example, Barclays
BCS, +0.84%
issues a pair of exchange-traded notes: iPath Dow Jones AIG Natural Gas ETN
GAZ, -0.85%
and iPath Dow Jones AIG Energy ETN
JJE, -2.04%
which are up 45.6% and 34.1% year to date.

Meanwhile, MacroShares Oil Up
UCR, +3.49%
has gained 24.3% so far this year, according to Morningstar. In fact, oil's ascent has been so rapid that the trust and its sister product, MacroShares Oil Down
DCR, +50.00%
are scheduled to terminate. The interlinked products pledge to compensate each other based on the movement in oil prices, but the rally has drained the assets in the "down" version. See related story.

'Superspike'

Although some market watchers say the global boom in commodity prices is running on fumes, other Wall Street analysts say crude-oil prices, which recently broke through $120 a barrel to record highs, are ready to scale new heights.

Goldman Sachs
GS, -1.03%
which correctly predicted in 2005 that oil prices would reach triple digits, recently said crude could hit $200 a barrel in another "superspike." The investment bank said oil prices are increasingly likely to hit between $150 and $200 a barrel over the next six to 24 months.

"We believe that the current energy crisis may be coming to a head, as a lack of adequate supply growth is becoming apparent," Goldman Sachs wrote in a research note.

Goldman Sachs highlighting the possibility of $200 oil "might have caused a chuckle on Wall Street in the past, but today it was taken on a serious note," said Matt McCall, president of Penn Financial Group, in his ETF newsletter this week.

When Goldman Sachs wrote a similar report predicting oil could hit $100, "most thought they were out of their minds and looked the other way," he wrote. "With oil hitting $122 a barrel today, now who is laughing?"

Of course, investors who think energy prices are due for a correction can short-sell ETFs and ETNs, since they trade like individual stocks on an exchange. There are also ETFs designed to automatically provide the inverse, or opposite, return of energy companies.

For example, ProShares UltraShort Oil & Gas
DUG, +5.15%
seeks daily investment results, before fees and expenses, that correspond to twice, or 200%, the inverse of the daily performance of the Dow Jones U.S. Oil & Gas Index. This ETF has lost 17.6% year to date as higher oil prices means the market has moved against its bearish strategy.

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